Let’s talk about vesting.

What does vesting mean?

Founders and key employees are often granted shares of stock or options to purchase shares of stock with vesting.  Vesting means that the founder/key employee will earn the shares over time by continuing to provide services to the company. 

How does vesting work?

Startups are generally set up with shares vesting over four years with a one year “cliff”.  The one-year cliff means that 25% of the shares will vest after the founder/employee completes one year of service to the company.  Each month thereafter, the founder/employee will vest 1/48th of their shares until they are fully vested into the shares by continually providing services to the company for four years.

Why do companies issue shares on a vesting schedule?

Vesting is optional, but many companies choose this option to incentivize founders and key employees to stay with the company and give them a stake in the ownership of the company commensurate with the time they have expended in developing the company.  At the same time, vesting protects the company, by allowing the company to retain control of the unvested shares if a founder or employee “leaves early,” as opposed to granting the founder/employee a large ownership stake in the company outright.

What if I leave the Company before my shares have vested?

If the service provider leaves the company before the shares have vested, typically, the Company has the right to repurchase the shares at the original purchase price, or rights to the unvested shares are forfeited.

Where can I find the terms of my vesting?

Typically, the vesting schedule is found in the Limited Liability Company Operating Agreement.  In the case of a corporation, vesting can be included in the Stock Purchase Agreement, an Equity Incentive Plan and/or an Award under the Plan.

This article is for informational purposes only and should not be taken as legal advice. It may not reflect the current law or the law in your jurisdiction. When acting upon the information presented herein, seek advice of counsel in the relevant jurisdiction.

Published by Catherine Edmunds

Business attorney, specializing in corporate and securities matters.

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